Should Governments Run Power Plants?

Kaysville is a mid-sized city with a population around 28,000 that sits in the heart of Davis County, Utah. Along with 22 other municipal purchasers in Utah, six purchasers from California, and six cooperative purchasers, Kaysville supplies its residents with electricity through the Intermountain Power Agency’s (IPA) Intermountain Power Project (IPP).

Kaysville, along with Bountiful city, acquired partial ownership in IPP in 1982 as part of a “calculated risk” in the event that power prices were to rise unexpectedly. By using the revenues generated from the sale of power to California, the city was able to provide the funds for the city’s share of operation and maintenance costs.

On its face this seems like a good idea. By allowing the government to take such commercial action on behalf of the people, it is theorized that the community as a whole will benefit. After all, by using the bulk purchasing power of government, the people can receive their electricity at a much lower cost than if they were to go it alone. (The same argument is used in support of government-organized health insurance exchanges.)

Opponents of the idea stress that while in theory it sounds good, the reality is that government is run by fallible men. These individuals can easily make poor decisions, and/or become corrupt. At a minimum, even an honest government can never act in the best interest of all citizens simultaneously; there will always be someone who is worse off for any given decision made. Thus there is no way for the government to conduct such operations without violating the rights of at least one individual. Eventually the incompetence or corruption of government will put some people in a far worse position than they were before.

But enough of the theoretical—how has the power plant worked out?

In the several decades that have passed since the investment in IPP by Kaysville city, is there any evidence of incompetence or corruption? There is, and it’s quickly becoming a big issue to some Kaysville City residents.

On October 16th of 2012, the Kaysville City Council voted to raise power rates by 10% “to accrue reserves for the city’s power fund, which is used to operate the city-owned power plant.” This is the simplest illustration of why governments should not own power plants—a business best left to the more efficient and accountable private sector. The city has taken on a legal obligation as a partial owner in a business, and that business is now not profitable enough to cover its costs. Using the unique taxation power held by government that is not wielded by the private sector, the city extracts the money it needs to cover its wrongly incurred liabilities from citizens under the color of law. This is not only a violation of individual rights but also the free market. Because of its ability to tax its problems away, socializing its losses amongst the masses, the city is prevented from feeling negative market forces the way a traditional business would after making a poor investment. No private business could get away with this, but citizens are largely powerless until the next election, and even then only if enough citizens take the time and responsibility to inform themselves and head to the polls.

Why was the city’s reserve fund short in the first place? It turns out that the city had taken money from its electrical fund to purchase some land. This purpose does not even closely resemble the reason given to residents for the collection of the electrical fund tax.

Earlier this year, the Standard Examiner reported that Kaysville City would be receiving a windfall $5.3 Million from the sale of some land to Terra Basin, LLC—the same land that was purchased with electricity reserve fund money. Whether planned this way or not, the city forcibly taxed residents to support the city’s private business interests in an electricity plant from which they receive no benefit (power is more expensive for Kaysville residents than many surrounding communities. They would be better off in the private sector). If this isn’t bad enough as is, the money was then taken for the city’s use in their private real estate business.

After the power rate increases several months earlier, some residents have begun to vocalize their opposition to the city’s actions. They advocate that the city should use this newly acquired windfall to replenish the electricity reserve funds and return power rates to their previously lower amounts. Upon receiving this suggestion, when asked by the Standard Examiner, the city declined to commit to any action, though Mayor Hiatt did say, “I think it is reasonable to expect the city to reconsider a rate reduction when the property (sale) closes and funds.”

This circumstance is not an anomaly, as it is not the only time that Kaysville city has dipped into power plant funds to pay for other things that are not electricity related.

In May of 2012, the city of Kaysville was reported as “wanting to transfer power fund revenues to the general fund to pay the $265,000 annual cost of adding three new police officers to the force.” Orwin Draney, a long-time Kaysville resident said, “As a rate payer, I expect the money that I pay in my power bill be used to purchase electricity and to maintain the infrastructure to deliver that power to me and the community.” Such expectations are not at all unreasonable, and are shared by many other residents. More information about the financial management of Kaysville City is available from an audit conducted by the Utah State Auditor.

The story may have a happy ending. Fortunately, the residents of Kaysville are recognizing this gross misuse of funds and violation of their trust. Proposition 5 is being put forth on the November 5th 2013 ballot that will require funds collected in the name of electricity maintenance to be spent only on maintaining the power plant.

Why it matters

You may be asking yourself, what does government incompetence (at best) or corruption (at worst) in Kaysville have to do with me? There is a bigger lesson here about the inevitable nature of government. Wise statesmen, observing the history and nature of government, have affirmed that it is most accountable to the people at local levels. That being the case, if a comparatively small city like Kaysville can get so off-track, how much easier is it for state and federal governments to deviate from their proper role?

This issue highlights an important fundamental truth about government: left unchecked, its tendency is to grow and centralize its power. It is therefore important to restrict government power to the bare minimum required to protect life, liberty and property.

It is vitally important that we stand up to government when it oversteps its bounds and engages in practices that should be left to the private sector. The more we tolerate figurative coloring outside the lines, the more difficult it will be to clean up the mess. If we ever want to restrict the power wielded by Washington D.C., we must first set our own house in order.

Ben Porter is a software engineer and Iraq war veteran currently living in Kaysville, Utah. He is the proud father of three children.

Utilities have operated as monopolies for decades because it’s vastly inefficient to build to every home if you can’t get all of the customers. This is why you rarely have more than two providers for wired telecommunications services (and both were built using de facto and/or de jure monopoly over cable television or phone service). If you’re going to be stuck with a monopoly for a service that you’re almost required to use, why would a private monopoly be preferable to a public one?

Benjamin Porter

@elforesto
I’m not sure I accept the pretext that we have to choose between a public or private monopoly. I believe that if left to work, the free market would work something out. There are many options, an enumeration of which would be impossible. I can imagine joint construction of infrastructure, similar to how cell phone companies work. If a particular provider lacks coverage in an area they will often “rent” the service from the owner. I would bet this is the only way Sprint stays in business. I also don’t think that it would be long before someone figures out a cheaper way to do things that gives them a competitive edge. Right now there is very little market incentive to do that.

If the pretext is accepted, there are reasons to prefer a regulated private monopoly over a public one. For instance, if a regulated private company had increased rates to purchase real estate, the management would go to jail. It is much easier to hold a private corporation accountable because the enforcers of the law are a different party than the perpetrators of the crime.

This being said I don’t think a one size fits all policy is good for everyone. For example, in a rural or isolated community of moderate to low population, it may be best to go with the public monopoly. However, there is always great risk when letting the government fiddle around with business.

elforesto

@Benjamin Porter Open access can be a tricky thing. The success of the wholesale side depends on independent entities on the retail side doing a good job. It also pushes the ROI out much further into the future. The economics of the utility space are weird because of the physical requirements to build to customers. That’s why you rarely see multiple players for electricity, water, gas, sewer, etc.

Your point about public regulation of a private entity is well-taken, though. The adversarial approach may lead itself to better oversight, though it’s also possible for it to turn into a cronyist relationship.

davidmpark

I agree with this. Local government’s are out of control, just like state and fed. For-profit government is just wrong.

Start a newspaper to compete with DN and Trib – they’re both unreliable.

arthurwhitt

Lets see why the Kaysville City Council doesn’t want Prop. 5 to pass. When they raise our electrical rates and then transfer the excess to the general fund they don’t have to be accountable to the citizens of Kaysville. They can spend the funds any way that they want to.

In the past they have transfered the excess funds from the electrical account to the general fund and then used these funds to buy land. They have lost 20 million dollars of our money in this land speculation.

Kaysville City should not be in the business of competing against its citizens in business. If the three incumbents are reelected and prop 5 passes they have stated they are going to rewrite Prop..5. To prevent this from happening we need to elect the three candidates that are for Prop. 5.

If the city council was looking out for the citizens of Kaysville they would be for Prop. 5. The present method of increasing our electrical rates and transferring the money to the general fund continues to tax in the following ways.
1. This increases the operating costs of our schools. The county then increases our property taxes. So we get taxed again.
2. Private businesses have to raise the cost of their products. So we get taxed again.
3. We can’t take the electrical expenses off our income taxes. So we get taxed again.
4. All churches electrical rates go up and they require more money from its members to pay for the increased costs. So we get taxed again.
5 The 6% use tax on our electrical bill gets figured on a higher amount so we get charged an additional tax. So we get taxed again.

Although it’s grown a lot since I grew up there, Kaysville remains a small town, with a potentially active electorate – and a gossipy one.I would suggest that ‘following the money’ will root out some of the corruption in my little town. The real estate commission on the $5million ‘profit’ alone (the article mentions) is more than $300k. So whether the speculation even pays off or not, some lucky Realtor just made some pretty tasty bank! Ties to the mayor or the city council (or whoever oversees the IPP investment)? three guesses….

elforesto

@arthurwhitt It seems like a few restrictions on how municipal utilities operate should be able to take care of most of these problems. Start off by restricting rates to be no more than 5% above costs (to save for capital improvement projects or a reserve fund). Require that any funds beyond costs go into an electrical reserve of no more than the last year’s operating expenses which can only be spent on the power utility. Anything beyond that is refunded to ratepayers and rates must be accordingly adjusted.